Passive revenue is a myth

What I've Learned About Passive Revenue

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Anyone that has had a service based consultancy for long enough has chased the idea of passive revenue. Not having to ‘start from zero’ financially every month is an amazing feeling which allows you to sleep better at night.

As a consultancy, our business relies on us hitting a certain number of hours billed each day, week, and month.

If we estimate a project wrong, we either have to eat the cost of it or have that dreaded conversation with the client that we calculated wrong and now their budget is in jeopardy.

After getting burned on a few, or a lot, of over budget projects we naturally begin to look over the fence and see that the grass appears to be greener. We start to chase the idea of a product or educational course, sometimes with blind ambition.

When most people talk about passive revenue within a consulting practice, especially within the software space, we usually think about up-charging for hosting, re-marketing a related service, or creating a product to sell into a different market.

While creating hosting revenue and other added value services seems to make sense, I still recommend against it as now you have the support headaches. Why not just hand off the hosting to a company that specializes in it and offers 24/7 support? Is the extra $50/customer/month worth the potential hassle?

Now, selling into a new market is something that I’ve done more than once and paid the price for it. What we don’t realize is how important a captive audience is. If you have an engaged group of people that are listening and willing to purchase from you, it is way more valuable than a product. Once you have an audience, you can launch anything you want. Why are we trying to build a new audience around a new product that doesn’t exist yet?

For example, we created a staff scheduling solution for the restaurant industry about three years ago. It was a better version of what existed in the market at the time, but we underestimated how difficult the sales cycle would be. We were trying to sell to someone that was extremely busy and didn’t see the value in switching from what they currently were doing.

What we also didn’t realize is that creating something that people will rely upon really isn’t a passive revenue stream. You can’t sell it, and that is the end of the transaction. They require ongoing support, the addition of features, chasing expired credit cards, the list goes on and on. Most of the time a successful product isn’t about the product but more about the marketing and sales, so why not leverage the audience that you already have into buying more from you

So where does that leave us? Is it a good idea or no?

I think it all goes back to the notion of the get rich quick infomercials that we see on late night tv. We want that magic bullet to solve our cash flow issues and set it and forget it. So instead of chasing that elusive idea of passive revenue, why not focus on value added services and partnerships.

Here are five things that we are currently working on in our business to help grow our team and bottom line:

Focus on creating value over passive income

If you start with a real problem versus starting with a goal of revenue you might just make something of value. Plus it is less likely to be abandoned later when things are tough if you are just in it for the money.

Find partnerships with businesses that have similar clients

For example, if you run a carpet cleaning business, could you partner up with companies that paint and combine sales efforts to apartment complex owners. It might be more attractive for them to call one person and get everything done at once versus coordinating multiple vendors.

Client Retainers

One of the reasons that most of us in the consulting space go after a product or passive revenue stream is to smooth out the peaks and valleys of our cash flow. Another way to do this is to find a way to offer a retainer to your clients so that you have more predictable revenue coming each month. Take a look at your customer list and find those that have done recurring work with you over the last six months. See if you could offer them a guaranteed spot on the calendar each week or month at a slightly reduced rate.

Productize your services

Productizing your services works well if it is tough to differentiate your business from the competitors. It may be as simple as changing how you engage with your leads. If your competitors force them to contact you first to start the conversation, could you put your pricing and strategy out on your website for more of a self-service option? You will probably get fewer leads coming in, but they are far more likely to engage as they have seen the process and the pricing.

Get a foot in the door

We’ve discovered that there are a limited number of people, for one, have $40,000 to put towards a software idea, and two, are willing to spend that much money on something. What we have found success in is being able to help them with creating the strategy for their project at a very low price point. By working closely on the business roadmap with our customer helps demonstrate our knowledge and build trust before committing to the overall project.

At the end of the day, there are many ways to grow your business and a passive revenue stream might fit well. But don’t forget to validate the idea before spending resources on it. Hopefully you give one of the ideas above a try, I’d love to hear what has worke well for you!